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CAD
Despite our expectations, yesterday’s Canadian CPI print managed to surprise to the upside. While the headline beat was marginal, the fact that core-median and core-trim inflation rose by more than expected too was enough to send USDCAD 0.4% lower on the day. Even so, we think this reprieve for the loonie is likely to prove temporary. Price growth in Canada is only just back to target at 2.0% YoY, with CPI still below its peak, while there is plenty of disinflation still in the pipeline due to base effects. The balance of risks as we see it still points to inflation undershoots as the bigger concern, warranting an aggressive stance from the BoC in December. This view is seemingly shared by markets as well. Although traders did pare back BoC easing bets, the dose of easing expected before year end only dropped from 36bps to 33bps, hardly a radical reassessment. This now leaves jobs data in early December as key for the Governing Council. A weak print, as we expect, should tip the balance in favour of another 50bp cut, prompting another leg higher for CAD.
USD
Russia-Ukraine escalation risks caught market attention in a big way on Tuesday morning. The combination of a change to Russian nuclear doctrine, with news that Ukraine had targeted sites within Russia using long-range missiles, saw a notable risk of moving across markets, helping the DXY index to spike higher. By mid-afternoon, however, this had almost entirely unwound. As with other previous episodes of sabre rattling, the impact on markets proved temporary, with Russian threats seemingly empty words once again. That leaves the focus for traders on data and central bank speakers today, albeit the risk of either triggering a significant dollar move looks limited, which should keep FX price action muted despite a modest greenback bid playing out through early trading.
EUR
The focus for euro traders today should be on Q3 negotiated wages. These are expected to rise, based on individual country readings, with upside risks relative to the limited sell-side consensus. If realised, this should offer a counterpoint to some recent dovish ECB commentary too. Indeed, Panetta caught our eye yesterday on this score, suggesting that the ECB should be more aggressive in easing policy. All told then, this mix should mean upside risks for the euro today, especially when set against a modest EURUSD sell-off so far this morning. A retracement higher for the pair looks likely, all else being equal.
GBP
This morning’s CPI data showed that UK price growth rose to 2.3% in October, marginally above the 2.2% reading anticipated by both markets and Bank staff. Even so, we doubt this is likely to trouble the MPC. The headline is still broadly in line with forecasts, while services inflation exactly matched projections from the November MPR. With this in mind, and considering commentary from Governor Bailey and Co. in front of the Treasury Select Committee yesterday, we see little on the horizon to convince policy makers that their current one-cut-per-quarter easing stance requires adjustment. Perhaps unsurprisingly then, the FX reaction this morning has been muted. Sterling is marginally stronger against the euro, threatening to retest the 1.20 resistance level, while holding ground against a dollar that is trading on the front foot to start the day.